Content analysis has become a widely used method of analysis in financial accounting research (Beattie, 2005). In recent years, several papers in accounting journals have identified and discussed significant issues regarding the use of content analysis to investigate accounting disclosures. One strand of this literature takes corporate social reporting (CSR) as its context (i.e. Hackston & Milne, 1996; Milne & Adler, 1999; Unerman, 2000). More recently, the topic area of intellectual capital (IC) disclosures has been explored (Abeysekera, 2006; Guthrie, Petty, Yongvanich, & Ricceri, 2004). The present paper contributes to the latter area of enquiry.

IC is the term attributed to intangible assets which create company value (Mouritsen, Larsen, & Bukh, 2001). It is, at least in part,1 reflected in the difference between market and book values, as the value and impact of intangibles are inadequately reflected in the traditional accounting framework (Cordon, 1998). To highlight the potential significance of IC, studies have reported market-to-book multiples in excess of unity. For example, Gu and Lev (2004) report that the S&P 500’s average market-to-book ratio was 4.5 in September 2003 indicating for every US$ 4.5 of market value, only US$ 1 appears on the balance sheet. Beattie and Thomson (2005) found the mean market-to-book value for the UK FTSE 100 companies to be 2.52 based on data for year-end 2002/2003. In light of this evidence, a method for reporting IC information to external stakeholders appears to be required.

The term IC is now widely used among regulators, professional bodies and academics. Many attempts have been made at formal definition. However, according to Guthrie, Petty, & Johanson (2001), ‘intellectual capital frequently is poorly defined or is not defined at all’. Zambon (2005) has stated that a ‘generally agreed taxonomy’ is needed. Despite this apparent stumbling block, considerable efforts have been made to develop models for IC reporting (e.g. DATI, 2000 and DATI, 2002; DMSTI, 2003; Edvinsson & Malone, 1997; Lev, 2001 B. Lev, Intangibles: management, measurement and reporting, Brookings Institution Press (2001).Lev, 2001; Sveiby, 1997). Suggestions have been made to extend the balance sheet to integrate IC, or to create complementary balance sheets (Rylander, Jacobsen, & Roos, 2000). Recently, a focused narrative-based approach to IC reporting has been proposed (DATI, 2000 and DATI, 2002). However, the opportunity to report IC in narrative format already exists within corporate annual reports.

Corporate annual report narratives may provide the opportunity for IC reporting, but what about the incentive to do so? Voluntary disclosure of IC information can be explained in terms of theories such as positive accounting theory (PAT), legitimacy theory and stakeholder theory (Deegan, 2000; Deegan & Gordon, 1996). If company managers’ interests are aligned with shareholders, IC information will be disclosed if it brings benefits to the company (PAT). IC reporting provides companies with the opportunity to take advantage of increased transparency to capital markets, establishing trustworthiness with stakeholders and to employ a valuable marketing tool (Van der Meer-Kooistra and Zijlstra, 2001). Disclosure of IC information could be self perpetuating in terms of maintaining and enhancing IC value given that ‘intangible asset creation occurs through enhanced reputation and disclosure influences the external perception of reputation’ (Toms, 2002, p. 258). However, reluctance to report IC information may arise from fear of both loss of competitive advantage and litigation.2 Companies may disclose IC information to appear legitimate in the eyes of society and avoid the imposition of costs arising from non-legitimacy. The disclosure choices of comparable companies may shape legitimacy. IC disclosure may respond to the demands of the stakeholders most critical to the company’s ongoing survival (managerial branch of the stakeholder theory).

These theories are mutually consistent, IC disclosure being explained in terms of a cost-benefit trade-off. The ethical branch of the stakeholder theory appears to offer an alternative explanation. Companies recognise that different stakeholders have a right to IC information and so disclosure is responsibility-driven. However, executing responsibilities in terms of disclosure is not necessarily incongruent with increasing firm value. Another proposition (suggested by Miller, 1977, in the context of capital structure decisions) is neutral mutation. Companies fall into disclosure patterns or habits which have no material effect on firm value.

Given these theoretical explanations for disclosing (not disclosing) IC information, what is corporate practice? The disclosure of IC information in annual reports is beginning to be investigated using content analysis (e.g. Bozzolan, Favotto, & Ricceri, 2003; Brennan, 2001; Guthrie & Petty, 2000). (Other accounting-related documents that have been studied are IPO prospectuses, e.g. Bukh et al., 2003, presentations to analysts, e.g. García-Meca, Parra, Larrán, & Martínez, 2005, and analyst reports, e.g. Arvidsson, 2003.) This type of investigation could potentially serve two purposes. First, to measure the extent to which different categories of IC information are disclosed. Second, IC reporting in practice provides valuable examples of attempts to understand and capture the IC concept (Van der Meer-Kooistra and Zijlstra, 2001). Practical experiences would assist in the development of a ‘generally agreed taxonomy’ of IC terms, as called for by Zambon (2005).

To date, content analysis appears to have been mainly used with the aim of quantifying the number of IC disclosures, typically in relation to 22-25 categories of IC information. The observed level of IC disclosure has consistently been described as ‘low’, and this has been attributed to the lack of an established IC reporting framework and the general lack of a proactive stance by companies in attempting to measure and externally report IC information (Guthrie & Petty, 2000). However, the lack of an established IC reporting framework hinders not only the companies disclosing information. The depth and breadth of the IC concept evident in the academic literature, and the subjectivity involved in constructing an operational IC definition, could also be said to hinder researchers aiming to quantify IC disclosures. In this context, it is essential that the precise details of the content analysis method used are transparent, to allow findings to be interpreted and to make comparisons (or not) across studies. Transparency is important because the content analysis method used to investigate disclosures is reflective of the researcher’s conception of reality (Gray, Kouhy, & Lavers, 1995) – what the researchers perceive constitutes IC – rather than any potential objective reality which exists in relation to the IC concept. Despite this importance, a general lack of transparency in the content analysis methods used in the IC disclosure studies to date is apparent. Increased transparency in relation to the IC information found and how it is categorised would also clarify researchers’ understanding of the IC concept and assist in the development of shared meanings.

This need for transparency and the development of shared meanings has already been recognised by researchers in the CSR context. As noted in Gray et al. (1995, p. 85), ‘the use of content analysis either demands, or at a minimum implies strongly, that the categories of analysis are derived by reference to shared meanings and that the data collection and analysis must be replicable’. In their construction of a research database of social and environmental reporting, categories of disclosures and examples of types of information relating to the categories is provided. In doing so, the ‘result is at least transparent and replicable, even if it fails to meet an ideal of a fixed and perfect definition’ (p. 82).

The aim of the present paper is to highlight specific issues that arise in using content analysis to investigate the extent of IC disclosures. The use of content analysis in this context is debated through an analysis of prior studies and the use of an illustrative example (Next plc’s 2004 annual report). The present study responds to Abeysekera’s (2006) suggestions that coding frameworks used to analyse annual reports need to be critically analysed, and the real problems of comparability between IC disclosure studies need to be addressed. He calls for the operational issues arising from the use of content analysis research methods to investigate IC disclosures to be resolved. The present paper highlights and illustrates these issues. In doing so, it aims to contribute to the debate and help build a more secure foundation for future work.

The remainder of this paper is structured as follows. Section 2 considers the problems associated with defining the IC concept. Section 3 offers a review of extant content-analytic studies of IC disclosure in corporate annual reports. Section 4 documents the use of Next plc’s 2004 annual report to illustrate the use of content analysis to investigate IC disclosures. Summary and conclusions are offered in Section 5.